Is Imperial Tobacco Group PLC A Super Income Stock?

british american tobacco / imperial tobacco

Imperial Tobacco (LSE: IMT) (NASDAQOTH: ITYBY.US) has made a strong start to 2014, with its shares being up nearly 7%, while the FTSE 100 is currently down just over 1% year-to-date. Does this sharp price rise mean that shares are no longer an attractive ‘buy’ for income-seeking investors? Or is Imperial Tobacco still a super income stock?

Impressive Income

With a yield of 4.7%, Imperial Tobacco continues to offer an income that is considerably higher than that of the FTSE 100, which has a yield of 3.5%. Crucially, it is also above inflation and better than anything offered in a high-street savings account. Therefore, despite its recent price rise, Imperial Tobacco still ticks the ‘income box’ for investors.

However, where it really comes into its own as an income stock is with regard to its dividend per share growth. Over the last four years, Imperial Tobacco has grown dividends per share at an annualised rate of just under 10%. This is hugely impressive and highlights the stability of a tobacco company, since its revenues are not dependent upon the state of the economy. As such, it is clear that Imperial Tobacco offer a relatively stable (as well as relatively high) yield.

Future Growth

The dividend growth rate posted in recent years looks set to be repeated in 2014 in 2015, with Imperial Tobacco forecast to increase dividends per share at an annualised rate of 9.5% over the next two years. This is not only well ahead of inflation, but is significantly higher than the FTSE 100 dividend growth rate, which again highlights the company’s potential as an income play.

More Dividends To Come?

While Imperial Tobacco is generous when it comes to dividends, it still has headroom to pay out a greater proportion of net profit as a dividend. Indeed, in 2013 it paid out 63% of net profit as a dividend but since it is a mature company operating in a mature industry, it could be argued that this figure could go higher. Therefore, there seems to be considerable scope for dividends to continue their high single digit growth rate over the medium to long term.

A Super Income Stock

With an impressive yield and highly attractive dividend per share growth prospects, Imperial Tobacco remains a super income stock. The stability of its income stream means that this could prove to be a great income play over the medium to long term.

Despite this, Imperial Tobacco doesn't make it onto our list of 5 Shares You Can Retire On.

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Peter does not own shares in Imperial Tobacco.